The rising preference for Philippine sovereign liabilities reflects improved perceptions of risk, absence of liquidity pressures and low inflation, according to the latest comment of credit rating agency Moody’s Investors Service.
Christian de Guzman, VP and senior analyst for Sovereign Risk Group of Moody’s, said that prudent fiscal management has combined with solid performance of the balance of payments and economic growth to result in a steady improvement in key debt ratios.
This is the reason why the national government has been successful with its offerings, according to de Guzman.
“We expect the national government’s gross debt burden to fall to below 50 percent of GDP this year from 54.8 percent in 2009 and 74.4 percent in 2004,” de Guzman said.
He added that interest payments as a share of revenue are also set to shrink below 20 percent this year, down from 24.9 percent in 2009 and 36.9 percent in 2004.
“This will provide fiscal space for much-needed capital expenditure and social spending,” he added.
De Guzman stressed that the Philippines is exploiting favorable financing conditions to accelerate its ongoing debt liability management program.
He noted that since the current administration took office in July 2010, the weighted average time-to-maturity has increased by more than two years to over 10 years.
Ten-year benchmark yields have tightened considerably to around 5 percent currently from around 8 percent at the time of the last presidential elections in May 2010.
In the latest auction on November 12, Treasury bills were priced at 0.15 percent and 0.68 percent for durations of 91 days and 364 days, respectively.
Going forward, de Guzman said that Philippine debt management officials are planning a domestic debt exchange possibly by the end of the year.
In order to exploit ample onshore foreign currency liquidity, while further reducing the reliance on external funding, the Bureau of the Treasury is also preparing for an onshore dollar bond issuance next month.
“Given relatively healthy fiscal outcomes year-to-date and the fact that the fiscal balance through September is tracking well within the government’s target deficit of 2.6 percent of GDP, the Philippines’ active issuance during the second half of this year will likely depress its gross funding requirements for 2013,” de Guzman said.
De Guzman also said that recent plans of the national government to buy back bonds reflect improving government finances.
Last Friday, the government announced the results of a tender offer to buy back $1.46 billion from an eligible pool of $17.7 billion of outstanding foreign-currency-denominated sovereign bond issuances.
“In conjunction with recent funding exercises by the Philippines’ Bureau of the Treasury, the transaction improves the sovereign’s debt profile by lowering interest costs, extending average maturities, and mitigating foreign currency risk,” de Guzman said.
This transaction, according to de Guzman, effectively swapped higher-cost, foreign-currency-denominated debt with lower-cost, local-currency-denominated debt featuring longer tenors.
The tender offer applied to $17.7 billion worth of dollar- and euro-denominated debt with coupons ranging between 6.375 percent and 10.625 percent and maturities between 2014 and 2032.
Funding for the buyback came from a 10-year P30.8 billion or roughly $750 million global peso bond with a 3.9 percent coupon that closed last November 9, as well as a 25-year, 6.125 percent retail treasury bond that netted P188 billion or nearly $4.6 billion in late October.
Moody’s last month upgraded the country’s credit rating to a notch below investment grade, noting that despite the headwinds from softening external demand, “the country has demonstrated considerable economic strength and fiscal resilience.”
Moody’s upgraded the foreign and local currency long- term bond ratings of the Government of the Philippines to Ba1 from Ba2 with a “stable” outlook.
The rating is now the same as that given by Standard & Poor’s and Fitch Ratings, which recently placed the country a notch below investment grade.
De Guzman said that the key driver for the upgrade is the country’s “improved economic performance and continued fiscal revenue buoyancy in the face of deteriorating global demand.”
Moody’s also cited the country’s enhanced prospects for growth over the medium term and the stable financial system that poses limited contingent risks and provides a stable source of financing for the government.
“Despite the headwinds from softening external demand, the Philippines has demonstrated considerable economic strength and fiscal resilience,” de Guzman said.
Also, the rating agency said that the Philippines is now a “net external financial creditor: the central bank’s stock of foreign exchange reserves is larger than the country’s stock of external debt.” –JIMMY CALAPATI, Malaya